Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

November 10, 2005 12:08 ET

Calian Reports Fourth Quarter Results: Solid Results to End 2005

KANATA, ONTARIO--(CCNMatthews - Nov. 10, 2005) - Calian Technologies Ltd. (TSX:CTY) - All amounts in this release are in Canadian Dollars.

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the fourth quarter ended September 30, 2005. Revenues for the quarter were $50.4 million, an increase of 34% from the $37.7 million reported in the same quarter of the previous year. Net earnings were $3.1 million or $0.37 per share basic and $0.36 per share diluted, compared to $2.1 million or $0.25 per share basic and diluted in the same quarter of the previous year. For the year 2005, the Company reported net earnings of $8.7 million or $1.04 per share basic and $1.03 per share diluted, compared to $10.4 million or $1.24 per share basic and $1.22 per share diluted in the prior year.

"The Company ended the year with excellent execution on all of its contracts. When coupled with the one-time recovery of prior year investment tax credits, it translated into an outstanding quarter, a fitting conclusion to yet another successful year," stated Ray Basler, President and CEO.

"Our Health Services group continued to perform to expectations and during the quarter was given high marks by the customer for the success of the transition phase. Likewise, the Titan organization delivered record earnings as we continued to integrate their service offerings to maximize the value of this acquisition. And finally, excellent execution on SED projects nearing completion has allowed us to retire significant risk and thereby enhance divisional contribution," continued Basler.

As expected, cash balances improved during the quarter and our balance sheet remains clean and strong.

For 2006, we expect strong growth in the BTS division with the Health Services Support contract contributing a full year of revenues. The SED division will enter the completion phase on several of its large contracts and must continue to cope with the on-going consolidation and belt-tightening in the commercial satellite sector. Based on this present outlook, management's expects that consolidated revenues for 2006 will be in the range of $210 million to $225 million and net earnings per share in the range of $0.90 to $1.05.

About Calian

Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.

DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.




CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(dollars in thousands except per share data)

---------------------------------------------------------------------
Three months ended Year ended
September 30 September 30
(Unaudited)
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------

Revenues $50,405 $37,746 $177,777 $169,707
Cost of revenues 41,184 29,881 145,208 135,668
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Gross profit 9,221 7,865 32,569 34,039
Selling and marketing 1,166 1,078 5,180 4,508
General and administration 3,007 2,494 10,568 9,664
Facilities 647 633 2,698 2,691
Amortization of
capital assets 298 392 1,139 1,236
Amortization of intangibles 99 70 396 70
Prior year, investment
tax credit (Note 5) (984) - (984) -
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Earnings before interest
and income taxes 4,988 3,198 13,572 15,870
Gain on sale of
investment (Note 6) - 741 - 741
Interest income, net 107 135 545 467
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Earnings before
income taxes 5,095 4,074 14,117 17,078
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Income taxes - current 1,748 429 5,159 3,424
Income taxes - future 250 780 209 2,460
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1,998 1,209 5,368 5,884
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Earnings from continuing
operations 3,097 2,865 8,749 11,194
Loss on disposal of
discontinued operation
(net of income taxes)
(Note 13) - 756 - 756
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NET EARNINGS 3,097 2,109 8,749 10,438
Retained earnings,
beginning of period 23,384 19,143 19,740 13,202
Excess of purchase price
over stated capital on
repurchase of shares
(Note 10) - (1,008) - (2,052)
Dividend (674) (504) (2,682) (1,848)
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Retained earnings,
end of period $25,807 $19,740 $25,807 $19,740
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Earnings per share from
continuing operations:
(Note 8)
Basic $0.37 $0.34 $1.04 $1.33
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Diluted $0.36 $0.34 $1.03 $1.31
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Net earnings per share:
(Note 8)
Basic $0.37 $0.25 $1.04 $1.24
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Diluted $0.36 $0.25 $1.03 $1.22
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Weighted average number
of shares: (Note 8)
Basic 8,426,163 8,384,425 8,389,688 8,389,220
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Diluted 8,496,730 8,545,465 8,489,121 8,578,138
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

September 30, 2005 September 30, 2004
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ASSETS

CURRENT ASSETS
Cash and cash equivalents $17,889 $30,997
Accounts receivable 35,843 18,726
Note receivable 172 158
Work in process 3,609 3,747
Prepaid expenses and other 825 875
Future income taxes 2,166 2,428
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60,504 56,931
NOTE RECEIVABLE 186 358
CAPITAL ASSETS 3,551 3,873
INTANGIBLES 1,016 1,412
GOODWILL (Note 7) 9,518 5,923
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$74,775 $68,497
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES

Accounts payable and
accrued liabilities $24,343 $18,136
Unearned contract revenue 7,312 14,094
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31,655 32,230
FUTURE INCOME TAXES 43 96
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31,698 32,326
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CONTINGENCIES (Note 11)

SHAREHOLDERS' EQUITY
Share capital 17,270 16,431
Retained earnings 25,807 19,740
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43,077 36,171
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$74,775 $68,497
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

--------------------------------------------------------------------
Three months ended Year ended
September 30 September 30
(Unaudited)
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net earnings $3,097 $2,865 $8,749 $11,194
Items not affecting cash:
Interest on note receivable (11) - (42) -
ESPP compensation expense 8 11 32 41
Amortization 397 462 1,535 1,306
Gain on sale of investment - (516) - (516)
Future income taxes 250 780 209 2,460
--------------------------------------------------------------------
3,741 3,602 10,483 14,485

Change in non-cash
working capital
Accounts receivable (556) 10,702 (17,117) 4,077
Work in process 959 458 138 1,070
Prepaid expenses and other 62 (449) 50 (385)
Investment tax credits - 238 - 866
Accounts payable and
accrued liabilities 998 (671) 2,612 (941)
Unearned contract
revenue (1,564) (2,257) (6,782) (3,951)
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3,640 11,623 (10,616) 15,221
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CASH FLOWS USED IN
FINANCING ACTIVITIES
Repayment of debt - (827) - (897)
Issuance of common shares 271 35 807 1,044
Repurchase of common shares,
including cost associated
with repurchase (Note 10) - (1,246) - (2,478)
Dividend (674) (504) (2,682) (1,848)
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(403) (2,542) (1,875) (4,179)
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CASH FLOWS USED IN
INVESTING ACTIVITIES
Note receivable 200 - 200 -
Acquisition of
capital assets (121) (260) (817) (928)
Business acquisition - (4,302) - (4,302)
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79 (4,562) (617) (5,230)
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NET CASH INFLOW (OUTFLOW) 3,316 4,519 (13,108) 5,812
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 14,573 26,478 30,997 25,185
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $17,889 $30,997 $17,889 $30,997
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CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended September 30, 2005 and 2004
(dollars in thousands)
(Unaudited)


1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles except that these interim consolidated financial statements do not provide full note disclosure.

These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2004, with the exception of the application of the accounting policies described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.


2. ADOPTION OF NEW ACCOUNTING POLICIES

Stock-based compensation

Effective October 1, 2003, the Company early adopted the amended recommendations of the Canadian Institute of Chartered Accountants Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. The amended standard requires that all stock based awards made to employees be measured and recognized using the fair-value based method. During the twelve-month period ending September 30, 2005, the Company recorded a compensation expense of $32 (2004: $41) relating to its Employee Stock Purchase Plan (ESPP).

Business combinations, goodwill and other intangible assets

As a result of its recent acquisition of Titan Consulting Group Ltd., the Company adopted the recommendations of the Canadian Institute of Chartered Accountants Handbook Section 1581, Business Combinations and Section 3062, Goodwill and Other Intangibles Assets. The standard requires that the acquisition be accounted for using the purchase method of accounting and accordingly, the purchase price is allocated to the assets and liabilities based on their estimated fair values as of the acquisition date. The results of operations relating to the acquisition must be included in the consolidated financial statements from the effective date of acquisition. Intangibles are comprised of acquired customer relationships; order backlog, consultant database and non-competition agreements. Intangibles are amortized on a straight-line basis over their estimated useful life not to exceed five years. A portion of the purchase price is based on a multiple of earnings achieved during the period September 1, 2004 to August 31, 2005. At September 30, 2005 the final purchase price was determined and accounted for as an incremental cost of the acquisition resulting in an increase to goodwill.

3. ACCOUNTING ESTIMATES

For the period ended September 30, 2005 and September 30, 2004, there have been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years, with the exception of the additional provisions related to the eService business referred to in Note 13.

4. SEASONALITY

The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.

5. PRIOR YEAR INVESTMENT TAX CREDITS

During the fourth quarter of 2005, the Company re-filed its scientific research and experimental development (R&D) claim with respect to its 2003 fiscal year-end to increase its claim. The Company received its reassessment and $3,021 in additional R&D costs was allowed creating an additional $1,143 of investment tax credits available to recover from taxes already paid. Costs associated with the re-filing have been applied against the recovery resulting in a net recovery of $984. The investment tax credits have been recorded against income taxes otherwise payable. The Company also intends to re-file its R&D claim with respect to 2004. However, the level of qualified R&D activity was significantly lower than 2003 and therefore, the Company is expecting only minimal recoveries for 2004. The investment tax credits for the 2004 R&D claim will be recorded once the Company has been reassessed by the Canada Revenue Agency.


6. GAIN ON SALE OF INVESTMENT

During the fourth quarter of 2004, the Company sold its investment in Square Peg Communications Inc. (Square Peg) for $850. The gain on sale of investment was determined as follows:



Cash received $250
Net present value of note receivable 516
Legal and accounting cost (25)
----------------------------------------------
$741


7. GOODWILL

During the fourth quarter of 2005, the Company recorded the
additional purchase price relating to the acquisition of Titan
Consulting Group Ltd for $3,595. (Note 12)

8. EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as
follows:

Three Months ended Twelve months ended
September 30 September 30
2005 2004 2005 2004
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Weighted average number
of shares - basic 8,426,163 8,384,425 8,389,688 8,389,220

Addition to reflect the
dilutive effect of
employee stock options 19,050 161,040 73,408 188,918
Shares to be issued for
the Titan acquisition
(Note 12) 51,517 - 26,025 -
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Weighted number of
shares - diluted 8,496,730 8,545,465 8,489,121 8,578,138
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The number of options outstanding at September 30, 2005 is 24,245.


9. SEGMENTED INFORMATION

Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for
evaluation by the chief operating decision maker, regarding how to
allocate resources and assess performance. The Company's chief
operating decision maker is the Chief Executive Officer. The Company
operates in two reportable segments described below, defined by their
primary type of service offering, namely Systems Engineering and
Business and Technology Services.

- Systems Engineering involves planning, designing and implementing
solutions that meet a customer's specific business and technical
needs, primarily in the satellite communications sector.
- Business and Technology Services involves both short and long-term
placements of personnel to augment customers' workforces (Staffing)
as well as the long-term management of projects, facilities and
customer business processes (Outsourcing).

The Company evaluates performance and allocates resources based on
earnings before interest and income taxes. The accounting policies
of the segments are the same as those described in the significant
accounting policies note in the audited annual consolidated financial
statements.



Three months ended September 30, 2005
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $12,187 $38,218 $- $50,405
Earnings before
interest and
income taxes 3,173 2,405 (590) 4,988
Interest income, net 107
Income taxes 1,998
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Net earnings $3,097
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Total assets other
than cash and
goodwill $14,578 $32,257 $533 $47,368
Goodwill - 9,518 9,518
Cash 17,889
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Total assets $74,775
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Three months ended September 30, 2004
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $16,320 $21,426 $- $37,746
Earnings before
other income,
interest and
income taxes 3,070 581 (453) 3,198
Gain on sale of
investment 741
Interest income, net 135
Income taxes 1,209
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Earnings from
continuing
operations $2,865
Discontinued operation 756
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Net earnings $2,109
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Total assets other
than cash and
goodwill $11,014 $19,872 $691 $31,577
Goodwill 5,923 5,923
Cash 30,997
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Total assets $68,497
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Twelve months ended September 30, 2005
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Business and
Systems Technology
Engineering Services Corporate Total
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Revenues $50,303 $127,474 $- $177,777
Earnings before
interest and
income taxes 8,298 7,215 (1,941) 13,572
Interest income, net 545
Income taxes 5,368
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Net earnings $8,749
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Twelve months ended September 30, 2004
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Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------
Revenues $83,942 $85,765 $- $169,707
Earnings before
other income,
interest and
income taxes 14,744 2,790 (1,664) 15,870
Gain on sale of
investment 741
Interest income, net 467
Income taxes 5,884
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Earnings from continuing operations $11,194
Discontinued operation 756
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Net earnings $10,438
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10. SHARE REPURCHASE

During the quarter ending September 30, 2004, the Company acquired 120,000 of its outstanding common shares at an average price of $10.35 per share for a total of $1,246 including related expenses, through the Normal Course Issuer Bid initiated in May 2004. During the twelve-month period ending September 30, 2004, the Company acquired 214,900 of its outstanding common shares at an average price of $11.50 per share for a total of $2,478 including related expenses, through Normal Course Issue Bids initiated in May 2003 and May 2004 each for a period of one year. The excess of the purchase price over the average stated capital of the shares has been charged to retained earnings.


11. CONTINGENCIES

On January 24, 2005, the Company was served with a civil lawsuit by way of a Statement of Claim filed in the Ontario Superior Court of Justice claiming $100 million in damages from the Company and an employee of the Company for breach of confidence, breach of fiduciary duty and unlawful interference with economic interests. The claim relates to the recently awarded limitation of expenditure contract by the Department of National Defence for the provision and management of Health Service Providers. The contract value for the initial 5-year period is in excess of $400 million with the potential for 5 additional option years worth an additional $480 million in total. The Company intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision. The likely outcomes of the judicial review of the CITT decision and the civil lawsuit cannot be determined at this time.


12. BUSINESS ACQUISITION

On September 7, 2004, the Company acquired 100% of the outstanding shares of Titan Consulting Group Ltd. (Titan). Titan specializes in delivering skilled SAP, PeopleSoft, Oracle and Siebel professionals to industry and government on a per diem model to private and public sector clients. The purchase price was based on the book value of assets and liabilities as of the date of acquisition plus a multiple of 4.5 times Titan's earnings before interest, taxes and amortization (EBITDA) of up to $1,566 and 1 times EBITDA in excess of $1,566 achieved during the period September 1, 2004 to August 31, 2005. The purchase price will be satisfied with 90% cash and the balance through the issuance of common shares.

The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the assets and liabilities based on their estimated fair values as of the acquisition date. The results of operations relating to the acquisition have been included in the consolidated financial statements from the effective date of acquisition.

The following table summarizes the purchase price allocation that was determined by the Company based on internal appraisals of the fair value of the tangible and intangible assets acquired.



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Acquisition Contingent
date Consideration TOTAL
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Non-cash working capital $1,426 $- $1,426
Capital assets 70 - 70
Intangibles 1,482 - 1,482
Long-term debt (805) - (805)
Future income tax liability (548) - (548)
Goodwill (Note 7) 2,677 3,595 6,272
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Purchase Price $4,302 $3,595 $7,897
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Consideration: Net cash,
including
costs of the
acquisition $4,302 $2,884 $7,186
Calian shares 711 711
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Total consideration $4,302 $3,595 $7,897
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On September 7, 2004, the Company paid $691 for the book value of the assets and liabilities as of the date of acquisition, $3,524 as an advance payment on the earnout amount and $87 in costs of the acquisition.

The balance of the cash of $2,875 will be paid on or before November 30, 2005 and the Calian common shares will be issued on February 28, 2006 at the then-prevailing market prices. The Company has accrued the liability associated with the cash payment and the issuance of the shares in accrued liabilities. The shares to be issued on February 28, 2006 were not recorded as share capital due to the fact that the number of shares is unknown at September 30, 2005 as it is based on the average market price of the shares for the ten days prior to February 28, 2006. Based on the share price as at September 30, 2005, 52,050 shares would be issuable. These shares are included in the dilutive earnings per share calculation.


13. DISCONTINUED OPERATION

During the fourth quarter of 2004, the Company revised its estimate of the provision for future costs relating to the discontinued e-business operation and recorded an additional charge of $1,200 ($756 after tax). This charge represents a non-cash transaction. During the third quarter of 2005, the Company entered into a new agreement with the existing sub-tenant to lease a significant portion of the space for a 5-year period extending to April 2010 at the current market price. As a result, the Company will be required to assume a portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $2,100 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $960 per year. During the year, the Company received lease revenues of $838 (2004: $955).


14. COMPARATIVE FIGURES

Certain of the comparative figures have been reclassified to conform to the financial statement presentation adopted this fiscal year.

Management Discussion and Analysis - At September 30, 2005:

RESULTS OF OPERATIONS - FOURTH QUARTER 2005

Revenues:

For the fourth quarter of 2005, revenues were $50.4 million, representing an increase of 34% over the $37.7 million reported in the fourth quarter of 2004.

Systems Engineering's revenues were $12.2 million in the quarter, a decrease of 25% from the $16.3 million recorded in the fourth quarter of last year. While the mix of projects has changed from the previous year, reduced MSTAR revenues account for the majority of this decrease. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period. Business and Technology Services reported a 79% increase with revenues of $38.2 million compared to $21.4 million for the same quarter of last year. The majority of the increase is due to the inclusion of three months of revenues relating to the Health Services Support contract and the acquisition of Titan Consulting Group Ltd. The balance of the division also reported modest growth in this fourth quarter of 2005 compared to the prior year.

Gross margin:

Gross margin was 18.3% in the fourth quarter of 2005, which is significantly lower than the 20.8% reported in the fourth quarter a year ago. The decrease is attributable to a change in divisional proportions with the Business and Technology Services accounting for a greater percentage of the overall revenue base.

Gross margin in Systems Engineering was 27.8% compared to 28.1% in the fourth quarter of 2004. The SED division realized excellent margins this quarter due to solid execution and retiring risk on certain large contracts nearing completion compared to the 2004 margin when the margin was positively impacted by the MSTAR contract. Gross margin in Business and Technology Services was 15.2% compared to the 15.3% reported in the fourth quarter of 2004. Although the revenue mix changed as a result of the inclusion of Titan and the Health Services Support contract, the division was able to maintain a similar overall margin level.

Operating expenses:

Selling, marketing, general and administration expenses totaled $4.2 million or 8.3% of revenues in the fourth quarter of 2005 compared to the $3.6 million or 9.5% of revenues reported in the fourth quarter of 2004. The increase in absolute dollars is mainly attributable to the inclusion of operating expenses relating to the Health Services Support contract and the acquisition of Titan.

Prior year investment tax credits:

As indicated in Note 5, during the quarter the Company was allowed additional investment tax credits (ITC) net of costs of $984 with respect to 2003. These ITC recoverable were applied against income tax otherwise payable. The Company also intends to re-file its R&D claim with respect to 2004. However, the level of qualified R&D activity was significantly lower than 2003 and therefore, the Company is expecting only minimal recoveries for 2004. The investment tax credits for the 2004 R&D claim will be recorded once the Company has been reassessed by the Canada Revenue Agency.

Amortization of intangibles

The Company acquired intangibles as a result of its acquisition of Titan in September 2004 and recorded an amortization of $0.1 million similar to the amortization recorded in the fourth quarter of 2004. These intangibles are amortized over their expected useful life, not exceeding 5 years.

Earnings from continuing operations

As a result of the foregoing, the Company recorded earnings from continuing operations of $3.1 million or $0.37 per share basic and $0.36 per share diluted in the fourth quarter of 2005, compared to $2.9 million or $0.34 per share basic diluted in the same quarter of the prior year.

Income taxes

The provision for income taxes for the fourth quarter of 2005 was $2.0 million or 39% of earnings before tax compared to $1.2 million in 2004 or 30% of earnings before tax. The effective tax rate for the fourth quarter of 2004 reflects the fact that a significant portion of the gain on sale of investment recorded in that quarter was non-taxable.


Discontinued operation

During the fourth quarter of 2004, based on existing market conditions for leased space at the time, the Company revised its estimate of the provision for future costs relating to the discontinued e-business operation and recorded an additional charge of $1,200 ($756 after tax).

Net earnings:
As a result of the foregoing, the Company recorded net earnings of $3.1 million or $0.37 per share basic and $0.36 per share diluted in the fourth quarter of 2005, compared to $2.1 million or $0.25 per share basic diluted in the same quarter of the prior year.


RESULTS OF OPERATIONS - TWELVE-MONTH PERIOD ENDING SEPTEMBER 30, 2005

Revenues:

Revenues for the year were $177.8 million compared to $169.7 million for 2004, representing an increase of 4.8%. Revenues in the Systems Engineering segment decreased 40.1% to $50.3 million from $83.9 million and revenues in the Business and Technology Services segment increased 48.6% to $127.5 million from $85.8 million. Changes in divisional revenues is mostly attributable to the inclusion of six months of revenues on the Health Services Support contract and 12 months of revenues relating to the Titan acquisition, offset by a decrease in MSTAR revenues.

For 2006, the Systems Engineering Division will be completing work on several large contracts awarded in previous years. The division will continue to operate in an environment characterised by stiff competition for limited opportunities. Although the environment for the Business and Technology Services Division is showing signs of modest recovery, we do not expect a significant increase in additional government spending in 2006. However, the Health Services Support Contract will represent a full year of activity, which will have a significant impact on the overall growth for this division next year.

Gross Margin:

The gross margin during the twelve months of 2005 was 18.3%, compared to 20.1% for the equivalent period of 2004. The overall gross margin for the Company decreased as a result of the change in revenue mix created by the addition of the Health Services Support contract and the Titan acquisition offset by a reduction in MSTAR activities. Gross margins percentages for 2006 is expected to be somewhat diluted as we add a full year of the Health Services Contract to the mix and include a changing mix of SED projects.

Operating expenses:

Selling, marketing and general and administration, totaled $15.7 million or 8.9% of revenues in the twelve months of 2005 compared to $14.2 million or 8.4% of revenues for the same period in 2004. The inclusion of six months of the Health Services Support contract and twelve months of Titan's operating expenses represents the majority of the increase in absolute dollars. Operating expenses as a percentage of revenue increased primarily as a result of a change in revenue mix: revenue generated from MSTAR in 2004 which attracted only marginal operating expenses, was replaced in 2005 with revenue from the Health Services Support contract and the Titan acquisition which attracted additional dedicated operating expenses.

Prior year investment tax credits:

As indicated in Note 5, during the quarter the Company was allowed additional investment tax credits (ITC) net of costs of $984 with respect to 2003. These ITC recoverable were applied against income tax otherwise payable. The Company also intends to re-file its R&D claim with respect to 2004. However, the level of qualified R&D activity was significantly lower than 2003 and therefore, the Company is expecting only minimal recoveries for 2004. The investment tax credits for the 2004 R&D claim will be recorded once the Company has been reassessed by the Canada Revenue Agency.

Earnings from continuing operations

As a result of the foregoing, the Company recorded earnings from continuing operations of $8.7 million or $1.04 per share basic and $1.03 per share diluted for fiscal 2005, compared to $11.2 million or $1.33 per share basic and $1.31 per share diluted in the prior year.

Discontinued operation

During the fourth quarter of 2004, the Company revised its estimate of the provision for future costs relating to the discontinued e-business operation and recorded an additional charge of $1,200 ($756 after tax). During the third quarter of 2005, the Company renegotiated a new lease with the sub-tenant for a significant portion of its excess space at current market rates. As a result, the Company will be required to assume a portion of the costs associated with this facility. Management believes that the current provision of $2.1 million will be sufficient to cover the Company's share of the costs.


Income Taxes:

The provision for income taxes for the twelve-month period ending September 30, 2005 was $5.4 million or 38% of earnings before income taxes compared to $5.9 million or 35% of earnings before income taxes in the prior year. The income tax expense for 2004 was positively impacted by an increase in the effective income tax rate applied to the valuation of future income tax assets.

Net Earnings:

As a result of the foregoing, the Company recorded net earnings of $8.7 million or $1.04 per share basic and $1.03 per share diluted for fiscal 2005, compared to $10.4 million or $1.24 per share basic and $1.22 per share diluted in the prior year.



SUMMARY OF QUARTERLY FINANCIAL INFORMATION
--------------------------------------------------------------------
(dollars in millions, except per share data)

Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04

Revenues $50.4 $50.6 $38.7 $38.0 $37.7 $45.4 $49.2 $37.3
Earnings from
continuing
operations $3.1 $2.4 $1.8 $1.5 $2.9 $3.4 $3.2 $1.7

Net earnings $3.1 $2.4 $1.8 $1.5 $2.1 $3.4 $3.2 $1.7

Per Common
Share
Earnings from
continuing
operations
per share
Basic $0.37 $0.28 $0.21 $0.18 $0.34 $0.41 $0.38 $0.20
Diluted $0.36 $0.28 $0.21 $0.18 $0.34 $0.40 $0.37 $0.20

Net earnings
per share
Basic $0.37 $0.28 $0.21 $0.18 $0.25 $0.41 $0.38 $0.20
Diluted $0.36 $0.28 $0.21 $0.18 $0.25 $0.40 $0.37 $0.20


BACKLOG

The backlog at September 30, 2005 is $1,098 million with terms
extending to fiscal 2014. This compares to $257 million reported at
the end of September 2004. Contracted Backlog represents revenues
remaining to be earned on signed contracts, whereas Option Renewals
represent customers' options to further extend existing contracts
under similar terms and conditions. Most contracts provide the
customer with the ability to adjust the timing and level of effort
throughout the contract life and as such the following represents
management's best estimate of the ultimate backlog and related
consumption profile. During the quarter, the Company won a number of
contract renewals in competitive bidding situations thereby
maintaining the Company's excellent track record of securing repeat
business.


(dollars in millions) TOTAL Fiscal Fiscal Beyond
2006 2007
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Contracted Backlog $494 $135 $94 $265
Option Renewals 604 3 23 578
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TOTAL $1,098 $138 $117 $843
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Business and Technology
Services $1,062 $114 $112 $836

Systems Engineering 36 24 5 7
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TOTAL $1,098 $138 $117 $843

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FINANCIAL CONDITION AND CASHFLOWS:

Cash flows used in operating activities during fiscal 2005 were $10.6 million as compared with a cash inflow of $15.2 million in 2004. Cash flows from earnings decreased by $4.0 million and as expected, working capital requirements increased by $21.8 million over 2004 mainly due to requirements associated with the Health Services contract, significant milestone billings near year-end and a decrease in unearned contract revenues as the Company performed the work associated with upfront customer advances. At September 30, 2005, the Company had a short-term credit facility of $10 million with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An outstanding letter of credit in the amount of $0.6 million was applied against the available line.

As a result of increasing its dividend payment to $0.08 per share at the beginning of 2005, the Company paid $2.7 million in dividends or $0.32 per share compared to $1.9 million or $0.22 cents per share in the prior year.

Over the course of the next several quarters, management expects cash balances will be negatively affected by a decrease in unearned contract revenue and the final payment for the Titan acquisition. However, this cash outflow will be partially offset by positive cash flows from earnings. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.


SEASONALITY

The Company's operations have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.


OUTLOOK

Management believes the Company is well positioned for sustained growth in the long-term. The Company operates in markets that will continue to require the services that the Company delivers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business. Its acquisition strategy, focused on adding complementary businesses to the Company's mix, will also be a potential source of growth.

The Systems Engineering Division has been working within a depressed satellite sector for the last few years with no significant rebound expected in the near-term. In addition, several large satellite operators have recently been purchased using highly leveraged financial structures and industry consolidation continues. We believe this may impact capital spending, which in turn may reduce new opportunities in the near term. However, management believes that new systems adopting the latest technologies will be required in the medium term to maintain and improve service offerings. Although management is confident that systems such as MSTAR will continue to be in demand in the security and surveillance market it cannot predict the timing and extent of future orders. The continued strengthening of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in US dollars and EUROs.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although Calian has experienced delays during the last few years, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. The acquisition of Titan coupled with existing standing agreements for SAP and Peoplesoft resources, positions Calian to take advantage of the expected growth in government ERP requirements.

Due to significant signings in the past year in the BTS division coupled with a few large contracts nearing completion in the SED division, our backlog is heavily weighted towards BTS. The market environment for SED is expected to remain difficult in the short term whereas BTS enjoys a more favourable outlook. Accordingly, the company expects to experience a shift in both revenue and profitability proportions towards the Business and Technology Services division. As the BTS division traditionally earns lower margins, the changing mix will have a further dampening effect on operating profit percentages.

As indicated in Note 11 of the Company's financial statements, the Company was served with a civil lawsuit by way of a Statement of Claim for $100 million in damages from the Company and an employee of the Company. The Company intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision. The likely outcomes of the judicial review of the CITT decision and the civil lawsuit cannot be determined at this time.


GUIDANCE

Our current base of business for 2006 is firmer in some segments than others and when taken in conjunction with the above information related to the current market conditions and demand, the Company expects 2006 revenues to be in the range of $210 million to $225 million and net earnings per share in the range of $0.90 to $1.05.


FORWARD-LOOKING STATEMENT

Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the fourth quarter of 2005 and 2004, and with the Management Discussion and Analysis in the 2004 annual report, including the section on risks and opportunities.

Contact Information

  • Calian Technologies Ltd.
    Ray Basler
    President and Chief Executive Officer
    (306) 931-3425
    or
    Calian Technologies Ltd.
    Jacqueline Gauthier
    Chief Financial Officer
    (613) 599-8600
    www.calian.com
    ir@calian.com